The saving advantage

Question

I’m a 25-year-old graduate and am into my second year of employment in a hospital. I am currently debt-free and am thinking about venturing into saving and investing. I’m looking for some direction. I understand that starting early gives me an advantage, but I want to make sure I start out right. For your reference, my net pay is $3,000 per month and the one key financial goal I set for myself is to save $50,000 for a down payment by the time I’m 30.

Answer

When it comes to your money, starting early gives you a huge advantage—you’ve got that right. The first reason is compound interest. The earlier you start saving the more interest you will earn on your interest. Second, it gets you into the habit of saving. Establishing good financial habits when you’re young makes it much easier to sustain a healthy lifestyle over time, instead of trying to make up for bad behavior when you’re in your 40s.

Here are a few things I would do to capitalize on your youth:

Automate your down payment savings: Open a high-interest savings account with the best rate you can find and set up a pre-authorized contribution that matches your payday. I did a quick calculation using an online savings calculator to see if you’re on pace to reach your goal. If you earn 2% interest on your savings then you’ll need to save about $800 per month to hit your $50,000 goal in five years. You could save in a TFSA instead, but at $800 a month you’d hit the contribution ceiling for that account in a little over two years.

Be aggressive with your RRSP savings: You make a good amount of money for someone your age, but you may need to make some trade-offs between down payment savings and your RRSP. I am a big advocate of starting your RRSP young—I opened mine when I was 14—for the reasons I mentioned above, compound interest and adopting good financial habits. In your case, it might make sense for you to save part of your down payment in your RRSP, then borrow it under the Home Buyers’ Plan. Remember that your RRSP contribution will increase your tax refund, which is money that you can put towards your down payment.

Avoid lifestyle inflation: The transition from starving student to flush full-timer can be a tough one to navigate because of the risk of lifestyle inflation. This is the idea that the more money you have, the more you buy and therefore, the less you save. The best way to avoid it is to automate savings for what is really important to you and pay cash for everything else. Sticking to cash only is exceedingly tough, but it will really help you see your spending behavior clearly.

Go to the library and do your reading: Sure, financial education is available online and MoneySense.ca is a great place for it. But I would recommend you do this basic “lit” review first. Crack open a few books and call it “retro-research.” Here are a few suggestions:

• The Wealthy Barber Returns: David Chilton’s new book covers the basics in a smart, accessible and very funny way. It should be required reading for every Canadian.
• How NOT to move back in with your parents: The Young Person’s Guide to Financial Empowerment: Rob Carrick is The Globe & Mail’s personal finance columnist and his latest book is targeted directly at you. He covers everything from saving and investing to buying a car or a house.
• Moolala: Why smart people do dumb things with their money (and what you can do about it): I wrote this one and there are two reasons why I’m recommending it to you. First, it will give you a step-by-step plan to get a handle on your money. And second, the book focuses on insight, as much as knowledge. The latter is a commodity you can find anywhere. But the former is gold. Personal insight is what will inspire you and compel you to take actions that will bring your dreams to life.

I’ve given you a bunch of ideas on how to do the right things when you’re young. That being said, you’re only 25. Be sure to demonstrate a little bad behavior. You need a little something interesting to tell the grandkids.

Next: The Priority Pyramid

About Bruce Sellery

Bruce Sellery is the CEO of Credit Canada, the country’s longest-standing non-profit credit counselling agency. He is a former MoneySense columnist.